Service Tax Proposals under FInance Budget 2016

Service Tax Proposals Budget 2016CA Sri [email protected] by

Overview of Discussion Krishi Kalyan Cess; Changes in Negative List; Changes in Declared Services;Changes to Point of Taxation Rules, 2011;Changes to Section 67A;Changes in Recovery Provisions Section 73;Changes in Interest Section 75; Changes in Offences & Penalties Section 89;Changes in Prosecution Section 90 & 91;Insertion of New Sections 101, 102 and 103;Changes in Mega Exemption Notification;

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Overview of Discussion Changes in Abatement Notification 26/2012;Changes in Reverse/Partial Charge Provisions;Changes in Service Tax Rules, 1994; Changes in Cenvat Credit Rules, 2004; Indirect Tax Dispute Resolution Scheme

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Krishi Kalyan Cess

Krishi Kalyan Cess:

A new cess called Krishi Kalyan Cess is being introduced with effect from 01.06.2016 on all taxable services at a rate of 0.5% for the purposes of financing and promoting initiatives to improve agriculture or any other purposes relating thereto. 0.5% is on the value of taxable services and not on service tax.

Hence, with effect from 01.06.2016, the total service tax shall be 15% [14% - Service Tax, 0.5% - Swachh Bharath Cess, 0.5% - Krishi Kalyan Cess].

Credit of Krishi Kalyan Cess paid on input services shall be allowed to use for payment of such cess on the services provided by the service provider.

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Changes in Negative List

Changes in Negative List Educational Services:

Specified services pertaining to education were covered under the negative list entry (l);

The said entry is omitted and such services are moved to the Mega Exemption Notification. Hence, there will not be any change in taxation except technical issues.

Definition of educational institution in Mega Exemption Notification is amended to incorporate the entries existed in (l) of Section 66D.

Definition of approved vocational education course moved from Section 65B to Mega Exemption Notification.

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Changes in Negative List Services of Transportation of Passengers by a Stage Carriage:

Services of transportation of passengers with or without accompanied belongings by stage carriage were covered under the negative list and hence were out of service tax.

The existing entry is proposed to be omitted. Further, Entry No 23 of Mega Exemption Notification 25/2012-ST dated 20.06.2012 has been amended to incorporate the above omitted entry with minor change.

In effect, services provided by non-AC stage carriage are exempted and AC stage carriage were brought in tax net. Hence, services by AC stage carriage are subjected to service tax @ 40% of the value.

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Changes in Negative ListServices by transportation of goods by Aircraft or Vessel:

Services by way of transportation of goods by an aircraft or vessel from a place outside India to the customs station of clearance in India are covered under Entry (p) of Section 66D of Finance Act, 1994.

The existing entry is proposed to be omitted. Further, a new entry vide 53 under Mega Exemption Notification has been added to exempt services of transportation of goods by aircraft from a place outside India upto the customs clearance in India.

In effect, services provided by vessel were brought into tax net and an abatement of 70% is provided. The same value shall not be taken for the purposes of payment of customs duty.

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Changes in Declared Services

Changes in Declared ServicesAssignment by the Govt of Right to Use Radio Frequency Spectrum:

A new entry (j) is proposed to be inserted to clarify that assignment of government of the right to use the radio-frequency spectrum and subsequent transfers shall be a service and not a sale of intangible goods to fall in the ambit of VAT laws.

By virtue of the above entry, the spectrum allocation by Government of India shall be subjected to service tax. Since the said services are covered under the reverse charge mechanism, the person receiving such services shall be subjected to service tax in the hands of the service receivers.

Needless to say, the subsequent transfers made by manufacturer or service provider attracts service tax.

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Changes in Section 67A

Changes in Section 67A:Section 67A Date of Determination of Rate of Tax:

Existing Section 67A is contradictory with the Point of Taxation Rules, 2011. As per Section 67A the date of determination of rate of tax is as per the time when the taxable service has been provided or agreed to be provided.

However, the rate of tax as per Point of Taxation Rules, 2011 specifies otherwise. Hence, there existed a controversy as to whether 67A is to be applied or Point of Taxation Rules has to be applied.

Further, Section 67A never made a reference to Point of Taxation Rules, 2011. Now, the said section is amended to make a reference to such rules and accordingly rules are amended to such extent.

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Changes in POT Rules, 2011

Changes in Point of Taxation Rules, 2011:Rule 5 : Payment of tax in case of new services:

Rule 5 specifies point of taxation in case of new services. As per the said rule, no tax shall be required to be paid under the following scenarios:

Invoice has been issued and the payment received against such invoice before service become taxable;If payment has been received before the service becomes taxable and invoice has been issued within 14 days from the day when the service is taxed for the first time.

Two explanations are inserted to Rule 5 to clarify that the:

shall be applicable mutatis mutandis in case of new levy on services; such new levy or tax shall be payable in all cases other than specified above.

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Changes in Other Sections

Changes in Section 73- Recovery of Service Tax :Section 73:

As per Section 73 of Finance Act, 1994, the central excise officer can serve notices within 18 months from the relevant date for the cases of short payment, non-payment, short levy, non levy or erroneous refund.

The said period of 18 moths is replaced with 30 months.

Hence, now the central excise officer can go back for an additional period of one year when compared to the current situation. The proposed period of 30 months shall also be applicable for Section 73(3) instances.


Changes in Section 75- Interest:Section 75:

A new provision is added to levy interest on such instances where any amounts are collected as service tax but not paid by the due date. 18%, 24% and 30% are rescinded.

Vide above notification, the rate of interest is as follows:24% - where service tax is collected and not paid;15% - other than the above situation.

Further, the reduction of 3% of interest rate for assessees whose value of taxable services does not exceed 60 lakhs rupees still exists and accordingly interest rate shall be 12% for such assesses if they are not falling under the 24% instance.


Changes in Section 89, 90 & 91:Section 89 Offences and Penalities:

The monetary limit for offences mentioned in Section 89 knowingly evades payment of service tax, irregular availment and utilisation of Cenvat Credit, maintains false books of accounts or fails to supply information and collects amount as service tax and fails to pay such amount

has been increased from 50 lakhs rupees to 2 Crores rupees.

Section 90 & 91 Prosecution:

Section 90 & 91 has been amended to restrict imprisonment only to situations where service tax is collected but not paid if the said amount is more than Rs 2 Crores.


Insertion of New Sections

Insertion of New Sections 101, 102 & 103:Section 101:Services of construction and related to canal, dam or other irrigation projects provided to Governmental Authority were made exempted from 01.07.2012 to 29.01.2014.

Section 102:Restoration of exemption for certain services which were deleted from 01.04.2015. With this change, all construction activities provided to government, local authority and governmental authority shall be exempted till 31.03.2020.

Section 103:Construction services provided to airport or port were exempted till 01.04.2015. Section proposes to exempt services provided from 01.04.2015 to 29.02.2016 . The exemption shall continue till 31.03.2020


Insertion of New Sections 101, 102 & 103:

Service tax paid by the service providers during the period where exemption is withdrawn can claim refund of such service tax within 6 months from the date of receipt of assent of finance bill.

Such exemption is subjected to certain conditions namely payment of stamp duty, wherever applicable on contracts. In case of airports or ports, the concerned Ministry shall certify that such works are entered prior to 01.03.2015.


Changes in Mega Exemption Notification

Changes in Mega Exemption Notification: Services provided by a person to an Arbitral Tribunal:

Services provided by a person represented on an arbitral tribunal to an arbitral tribunal are exempted from service tax. Now, the said exemption is being withdrawn and accordingly services provided by such person are subjected to service tax.

Services provided by way of Original works to monorail or metro:

However, where contracts entered for provision of above services to monorail or metro prior to 01.03.2016 on which appropriate stamp duty was paid shall remain exempt. Services of Transportation of Passengers by Ropeway/Cable Car/Tramway:

Transportation of passengers with or without accompanied belongings by ropeway, cable car or aerial tramway are taxable since the exemption is withdrawn.


Changes in Mega Exemption Notification: Services provided by a Senior Advocate:

Services provided by senior advocate are brought into tax net. All advocates who are designated as Senior advocates by Supreme Court and High Court by virtue of Section 16 of Advocates Act, 1961 shall be senior advocates for the purposes of service tax laws.

Services provided by such senior advocates to other advocate or legal firm of advocates and business entities are subjected to service tax.

However, an exemption is provided if the senior advocate provides his/her services to a person other than the person ordinarily carrying an activity relating to commerce, industry or any other business or profession.

Not notified under RCM/PCM, hence senior advocate has to register and pay service tax.


Changes in Mega Exemption Notification: Services provided by IIM:

Following education programmes provided by IIM to its students are exempt from service tax:2 year full time residential post graduate programme in management for the PGDM for which admissions are made on the basis of CAT;Fellow programme in management; 5 year integrated programme in management.

However, services provided by IIM in respect of executive development programme are not covered under the above exemption and continue to be subjected to service tax.


Changes in Mega Exemption Notification: Services to Government, Local Authority or Governemental Authority:

Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of:

a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment;residential complex predominantly meant for self-use or the use of their employees or other persons specified

The exemption was withdrawn with effective 01.04.15 and being restored now. The same shall be extended to 31.03.2020 subject to a condition that contracts were entered prior to 01.03.2015.


Changes in Mega Exemption Notification: Services provided to Port or Airport Entry 14:

Services provided by way of construction, erection, commissioning, installation of original works pertaining to port or airport were taxable with effective from 01.04.15. Such exemption is being restored and shall be available till 31.03.2020 subject to a condition that contracts were entered prior to 01.03.2015.

Services performed by Artists Entry 16:

Services by a performing artist in folk or classical art forms of (i) music, or (ii) dance, or (iii) theatre, excluding services provided by such artist as a brand ambassador.

However, with effective from 01.04.2015, if the consideration charged for such performance is more than one lakh, the exemption shall not be applicable and accordingly taxable. Now the limit has been enhance to 1.5 lakhs.


Changes in Mega Exemption Notification: Other Important Exemptions provided:

Services by assessing bodies empanelled by Directorate General of Training by way of assessment under Skill Development Initiative

Services of life insurance business provided by way of annuity under the National Pension System regulated by Pension Fund Regulatory Development Authority.

Services provided by Employee Provident Fund Organisation to persons governed under the Employees Provident Fund and Miscellaneous Provisions Act, 1952.

Services provided by Insurance Regulatory and Development Authority of India to insurers under Insurance Regulatory and Development Authority of India Act, 1999


Changes in Mega Exemption Notification: Other Important Exemptions provided:

Services provided by SEBI by way of protecting the interests of investors in securities and to promote the development of, and to regulate, the securities market. Services provided by National Centre for Cold Chain Development under Ministry of Agriculture, Cooperation and Farmers Welfare by way of cold chain knowledge dissemination.


Changes in Abatement Rates

Changes in Abatement Rates 26/2012 : For Transportation of Goods by Road of used house holds:

An abatement of 60% has been provided without cenvat credit of inputs, capital goods and input services.

For services provided in relation to Chit:

The abatement has been withdrawn earlier and provided again now at 30%. Hence now taxable at 70%.

For Transportation of Goods by any person other than Indian Railway:

An abatement 60% has been provided without cenvat credit of inputs and capital goods. Hence, taxable portion is 40%.


Changes in Abatement Rates 26/2012 :

For Transportation of Goods and Passengers by Indian Railway: Earlier abatement was specified without cenvat credit of inputs, capital goods and input services. Now, the credit of input services is allowed without change in rates of abatement.

For Tour Operator Services:

An abatement of 90% has been provided for tour operators who are only engaged in arranging or booking of accommodation. The credit of input services can be availed. However, such abatement shall be with a condition that cost of accommodation is included in the invoice.

For all other tours, an abatement of 70% shall be available without cenvat credit of input, input services and capital goods.

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Changes in Abatement Rates 26/2012 :

For Construction Services:

Earlier an abatement of 75% used to exist for residential apartments. And for residential apartments with a carpet area less than 2000 square feet or cost of Rs 1 crore, the abatement used to be 70%. Now, all the apartments are subjected to 70% and hence the taxable value shall be 30%.

For Rent A Cab:

An explanation is inserted to include the fair market value of all goods (including fuel) and services provided by service recipient in the gross amount charged.


Changes in RCM/PCM

Changes in RCM/PCM 30/2012 :

In relation to Mutual Funds:

In relation to services provided by a mutual fund agent or a distributor to a mutual fund or asset management company the service receiver is not required to pay service tax henceforth Agent has to register and pay such tax;


Changes in Service Tax Rules,1994

Changes in Service Tax Rules, 1994: Rule 6:

OPC less than 50 lakhs turnover in the preceding FY & HUF can now pay service tax quarterly instead of erstwhile monthly.

OPC having less than 50 lakhs turnover in the preceding FY can opt for payment of service tax on receipt basis till first 50 lakhs turnover in the current FY instead of adopting POT Rules, 2011.

Rule 6(7A):

An insurer carrying a life insurance business can pay service tax on 1.4% of the single premium charged from the policy holder in case of single premium annuity policies.


Changes in Service Tax Rules, 1994: Rule 7, 7B & 7C:

Every assessee in addition to ST-3 has to file an annual return for the financial year to which the return relates in the form and manner as may be prescribed.

The time limit for filing the said return is 30th of November of the succeeding financial year. CG may exempt certain class of assessee from not filing such returns.

Revision of return can be made within one month from the date of filing of the original returns.

The person who has filed to file the return shall pay a penalty of 100/- per day during the period of delay in filing such return subject to a maximum of 20,000/-.


Changes in Cenvat Credit Rules, 2004

Changes in Cenvat Credit Rules, 2004: Rule 2 - Definitions:

Capital Goods:

Wagons of heading 860692 is included the definition of capital goods;Capital goods used in the office of the manufacturer shall be allowed; Capital goods used outside the factory of manufacture for pumping of water for captive consumption are now eligible

Inputs:

Goods used for pumping of water for captive consumption are now eligible; All capital goods which have a value upto ten thousand per piece.


Changes in Cenvat Credit Rules, 2004: Rule 2 - Definitions:

Exempted Services:

By way of transportation of goods by a vessel from customs station in India to a place outside India This will allow shipping companies to take credit on inputs, input services and capital goods used in providing the service can be taken now and utilised against the service tax payable on transportation services provided from outside India to India. Thus, providing a level playing field with Foreign Shipping companies.

Input Service Distributor:

The place of outsourced manufacturing unit is now an eligible person to receive the credit from ISD.


Changes in Cenvat Credit Rules, 2004: Rule 3 Cenvat Credit:

The said rule is amended to state that cenvat credit shall not be utilised for payment of Infrastructure Cess leviable on manufactured goods.

Rule 4 Conditions for allowing Cenvat Credit:

Jigs, Moulds and Dies or Tools:

The cenvat credit on jigs, fixtures, moulds and dies or tools falling under Chapter 82 of Central Excise Tariff Act can be availed even such goods are directly sent to another manufacturer or job worker without bringing to his own premises. This was aligned with inputs and capital goods which were amended last year.


Changes in Cenvat Credit Rules, 2004: Rule 4 Conditions for allowing Cenvat Credit:

Service Tax paid on Right to Use Natural Resources:

Eligible Credit = Service Tax paid on charges payable for the assignment of right to use/No. of Years for which rights have been assigned. However, the said formula does not apply to instances where annual or monthly user charges are paid to use such natural resources.

If the manufacturer or service provider transfers such right to use natural resource to another person during a financial year against a consideration, he shall be eligible to take the balance of cenvat credit to the extent it does not exceed the service tax payable on the consideration charged by him.


Changes in Cenvat Credit Rules, 2004: Rule 6 Obligation on Manufacturer or Output Service Provider:

Entire Rule 6 is scrapped and a new methodology has been introduced for arriving the common eligible cenvat credit.

Under the new rule, there are 2 options:Paying 6% on value of exempted goods and 7% on exempted services; Paying an amount arrived as per sub-rule (3A).

Rule 6(3B):

Banking companies and Financial Institutions including NBFCs can also exercise the options above apart from their regular 50% reversal.


Changes in Cenvat Credit Rules, 2004: Rule 6(4) Capital Goods exclusively used for exempted goods/services:

The credit of capital goods exclusively used for manufacture of exempted goods or provision of exempted services was not eligible. However, if such capital goods are subsequently used for manufacture of excisable goods or provision of taxable services, the credit stands eligible as of now.

With the current amendment, the credit cannot be availed if such capital goods are used for 2 years from the date of commercial operations. If capital goods are received after commercial operations, 2 years has to be reckoned from the date of installation of such capital goods. However, the subject amendment shall not effect the SSI/SSP assesses.


Changes in Cenvat Credit Rules, 2004: Rule 7 Manner of distribution of Credit by ISD:

OMU is defined and now eligible for receipt of cenvat credit from ISD. OMU:Job worker who is required to pay ED as per Rule 10A of CE Valuation (DoPoEG) Rules, 2000Contract Manufacturer, bearing a brand name of ISD and liable to pay ED as per Section 4A

Manner:Credit of a particular unit can be distributed only to such unit; Credit of service tax attributable as input service to more than one unit but not to all the units shall be distributed only amongst such units to which the input service is attributable and such distribution shall be pro rata on the basis of the turnover of such units, during the relevant period, to the total turnover of all such units to which such input service is attributable and which are operational in the current year, during the said relevant period.


Changes in Cenvat Credit Rules, 2004: Rule 7 Manner of distribution of Credit by ISD:

Manner:

the credit of service tax attributable as input service to all the units shall be distributed to all the units pro rata on the basis of the turnover of such units during the relevant period to the total turnover of all the units, which are operational in the current year, during the said relevant period;

outsourced manufacturing unit shall maintain separate account for input service credit received from each of the input service distributors and shall use it only for payment of duty on goods manufactured for the input service distributor concerned;

Only credits post 01.03.2016 are eligible for distribution by ISD to outsourced manufacturing units.


Changes in Cenvat Credit Rules, 2004: Rule 7B New Rule:

Rule 7B is being inserted so as to enable manufacturers with multiple manufacturing units to maintain a common warehouse for inputs and distribute inputs with credits to the individual manufacturing units.

It is also provided that a manufacturer having one or more factories shall be allowed to take credit on inputs received under the cover of an invoice issued by a warehouse of the said manufacturer, which receives inputs under cover of an invoice towards the purchase of such inputs. Procedure applicable to a first stage dealer or a second stage dealer would apply, mutatis mutandis, to such a warehouse of the manufacturer.


Changes in Cenvat Credit Rules, 2004: Rule 9A Existing return for Principle Inputs is replaced:

Rule 9A is substituted to provide for filing of an annual return by a manufacturer of final products or provider of output services for each financial year, by the 30th day of November of the succeeding year in the form as specified by a notification.

Rule 14 Recovery of Cenvat Credit:

The existing sub- rule (2) of rule 14 prescribes a procedure based on FIFO method for determining whether a particular credit has been utilized. The said sub-rule is being omitted.

Now, whether a particular credit has been utilised or not shall be ascertained by examining whether during the period under consideration, the minimum balance of credit in the account of the assessee was equal to or more than the disputed amount of credit.


Other Changes

Changes in Notification 27/2012 &Rule 5 CCR: Rule 5 Refund of Cenvat Credit:

Rule 5 provides for refund of cenvat credit of excise duty and service tax when the goods or services are exported subject to conditions mentioned in Notification No 27/2012-CE(NT) dated 18.06.2012.

As per the said notification, the time limit to file refund claim is before the expiry of one year of period specified in Section 11B of Central Excise Act, 1944

However, Section 11B does not talk about the relevant date for export of service and hence the general time limit is being made applicable to such exports also. In order to put rest to the notification is amended and time limit for reckoning one year for export of services is specified.


Changes in Notification 27/2012 &Rule 5 CCR: Rule 5 Refund of Cenvat Credit:

Accordingly , refund has to be filed before the expiry of one year from the date of:

Receipt of payment in convertible foreign exchange, where provision of service has been completed prior to receipt of such payment;Issue of invoice, where payment for the services had been received in advance prior to the date of issuance of invoice


Indirect Tax Dispute Resolution Scheme: Indirect Tax Dispute Resolution Scheme:

New scheme called Indirect Tax Dispute Resolution Scheme, 2016 is introduced vide Chapter XI of the Finance Bill, 2016.

Who are eligible for the scheme:

The scheme shall come into force with effect from 01.06.2016;It shall be applicable to the declarations made upto 31.12.2016; Any assessee whose appeal is pending before Commissioner (Appeals) as on 01.03.2016 is eligible for filing of declaration under the said scheme;

Who are not eligible under the scheme as far as service tax is concerned:

The impugned order is in respect of search and seizure; Prosecution of any offence punishable has been instituted before 01.06.2016;


Indirect Tax Dispute Resolution Scheme: Modus Operandi:Apply before 31.12.2016;Receive acknowledgment from DA;Pay = service tax + interest + 25% of penalty imposed within 15 days from acknowledgment; Intimate to DA within 7 days along with the proof thereof;DA shall pass discharge of due within 15 days from the receipt of the intimation from the declarant;Amount paid shall not be refunded in any case.

Benefits from Declaration:Appeal pending before Commissioner (Appeals) shall stand disposed and immunity from all proceedings under the act and No matter relating thereto shall be reopened thereafter in any proceedings under the Act before any court or authority.


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Service Tax Proposals under FInance Budget 2016